Sterling and the AUD at Their Highest Correlation in Nearly Four Years - BBH
Sterling and the AUD at Their Highest Correlation in Nearly Four Years - BBH
Research Team at BBH, have argued that the place to look for investor
anxiety about the UK referendum is not the spot market but the options
market.
Key Quotes
“At the start of next week, it is a month away. The one-month volatility
and risk-reversal will replace the two-month tenor as the indication of
the cost of insurance. More polls have come out, and the one that has
captured the market's attention (sponsored by the Telegraph) found a
seven-point swing toward the "Remain" camp over the past month. That
puts the status quo in a 55-40 lead.
Some press accounts attributes sterling gains to this poll, but this
seems a bit selective use of evidence. The ICM conducted two surveys one
by telephone and one online. This produced conflicting results. By
telephone, "Remain" was ahead 47-39. Online participants gave Brexit the
lead 47-43.
Also, a seven point swing is large in a month and may be a statistical
quirk. Other surveys need to confirm that the undecideds are breaking
toward the status quo, as is typically the case, to validate the
Telegraph's results. We note that there has not been comparable shift in
the event markets.
An alternative hypothesis is that sterling is responding to the same set
of fundamentals as the Australian dollar. There is no greater crisis
that the RBA needs cut interest rates at back-to-back meetings. Part of
the reason is the rebound in commodity prices. The UK is not a large
commodity producer of course. However, there are several large companies
that report their earnings in the UK, which are tied to the price of
commodities. In fact, there have been some reports linking the
deterioration of the UK current account to the drop in profits and
repatriated earnings from a couple of dozen companies.
Behind that explanation lies the statistical fact that sterling and the
Australian dollar are at their highest correlation in nearly four years.
On a percent change basis, the correlation of the two over the past 60
days is 0.65.”
